With the conflict between Russia and Ukraine dominating the recent news cycle, it’s likely you’ve been hearing more and more about cryptocurrency. Countries around the globe have imposed sanctions on Russia and frozen accounts of oligarchs. This has sent the Russian Ruble into a tailspin. When fiat currency is in decline, people ad business will search out other means of payment.
As a result, we’ve seen cryptocurrencies used to supplement fiat currency as well as to aid Ukraine through large donations of Bitcoin, Ethereum, and Polkadot. The crisis in Ukraine has only aided in the adoption of cryptocurrency and the trend shows no signs of slowing down. In fact, the United States has taken notice and is fully ready to dive in and get involved in a serious way.
Next week, President Biden is expected to issue an executive order directing various government agencies across multiple sectors to study how cryptocurrency could impact our financial stability as well as a possible framework for a Central Bank Digital Currency (CBDC). And in the here and now, Fed Chair Jay Powell says Russians using crypto to defy ruble sanctions underscores the need for clearer regulatory oversight.
So where do the crypto rules go from here? And where are the opportunities for investors while we’re waiting?
Standardization of Cryptocurrency Regulations
With cryptocurrency becoming more mainstream and the possibility for crypto to remove middlemen from transactions (think of banks and other financial institutions) the president is jumping to get ahead of changes caused by its further adoption. These various agencies are expected to assess what powers regulators have and come up with a possible government-wide strategy to regulate digital assets. As several countries are already taking measures to regulate, we are expecting the U.S. government to work with other countries to standardize cryptocurrency regulations across the globe.
The Director of the Office of Science and Technology Policy (OSTP) will be working on a technical evaluation of what might be needed to support a CBDC system. This comes after the fed published a paper in January titled Money and Payments: The U.S. Dollar in the Age of Digital Transformation, in which they lay out the pros and cons of a CBDC system, as well as discussing the possible threats to banks posed by cryptocurrencies.
Late last year, the Financial Stability Oversight Council (FSOC) published an annual report in which stablecoins (cryptocurrencies where the price is designed to be pegged to a cryptocurrency, fiat money, or to exchange-traded commodity) and other crypto assets were identified as a possible threat to the financial system. The FSOC recommended that state and federal regulators review regulations and tools that could be applied to digital assets. The council is also looking at possible privacy issues surrounding the space, as well as distributed ledger technology (the underlying framework for cryptocurrencies) and what powers regulators may have in the space.
FBI Involved in New Crypto Unit
Even the FBI is involved, forming a new crypto unit led by a highly experienced computer crimes prosecutor named Eun Young Choi. Choi has impressive credentials under her belt, including being the lead on a case against a Russian hacker who helped steal information about more than 80 million JPMorgan & Chase Co. customers and serving as an Assistant United States Attorney for the Southern District of New York. While serving in New York, she was the Cybercrime Coordinator, where she investigated and prosecuted cyber, fraud, and money laundering crimes. Her focus was on network intrusions, digital currency, the dark web, and national security investigations.
The SEC, The Commodity Futures Trading Commission (CFTC), Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) will all be expected to weight market protection measures within their respective jurisdictions. The FTC Chairman and Director of the Consumer Financial Protection Bureau (CFPB) will be looking at potential privacy issues created by digital assets.
The Commerce Department, Treasury, State Department, and The United States Agency for International Development (USAID) will work to create a framework for interagency international engagement with foreign counterparts in an international forum to enhance the adoption of, and standardize rules for, digital assets.
Stability Issues Caused By Crypto
Established by the Dodd-Frank Act to protect the U.S. economy from the actions of large banks that led to the Great Recession, the Financial Stability Oversight Council (FSOC) will be looking at financial stability issues that arise from digital assets. Stability issues caused by crypto are on a lot of minds, with the International Monetary Fund (IMF) addressing cryptocurrencies in its Global Financial Stability Report in October of 2021.
The Attorney General, Federal Trade Commission (FTC), and the Consumer Financial Protection Bureau will analyze cryptocurrency’s impact on market competition and consider what impact the further growth of digital assets could have on market competition over time.
The Treasury, Securities and Exchange Commission (SEC), Commodities Futures and Trading Commission (CFTC), and federal banking agencies will work together to develop a report for the president to advise on how best to protect against the risks associated with cryptocurrencies. The Office of Science and Technology Policy (OSTP) will be expected to submit a report to President Biden on digital distributed ledger technology (DLT) within 180 days and provide an update on DLT and its impact on the environment within 545 days.
The Bottom Line
So, where does that leave investors when it comes to cryptocurrencies? Is it time to buy?
Cryptocurrency is still incredibly volatile, behaving more like a wildcard stock than a settled “currency.” That rollercoaster experience provides the charm for some, but for others, finding out that the car has no brakes can easily become a nightmare . . . especially with 24/7 trading, significant swings in prices can happen at any time of the day.
Regulation could alleviate some uncertainty and lend some price stability, but at the cost of putting brakes on the rollercoaster. Either way, that is still a long way off and crypto is still the Wild West. For now, stick with the publicly traded exchanges and crypto banks that make money whether individual crypto tokens rise or fall.
Coinbase (COIN) has been one of the strongest new stocks to hit Wall Street in the past year . . . I have high hopes for it in the long haul. Silvergate Capital (SI) will always be close to my heart. Hard to believe I started recommending it below $13!
And I’m eager to see where Jack Dorsey takes the company formerly known as Square (SQ) into deeper blockchain ventures. Tokens come and go. The chain, by definition, is where the real action happens.